Introduction

In today’s regulatory environment, maintaining accurate and transparent records is not just good governance—it’s a legal obligation. For companies operating in India, particularly those falling under specific thresholds and sectors, maintaining both cost records and financial records is a mandatory compliance requirement under the Companies Act 2013.

But what exactly are cost records and financial records? And why is it important to maintain both?

Many businesses mistakenly believe that maintaining financial statements like the balance sheet, profit and loss account, and cash flow statement is sufficient to meet compliance standards. However, companies notified under the Companies (Cost Records and Audit) Rules, 2014 are also required to maintain cost accounting records as per the CRA-1 format, and submit cost audit reports (CRA-3) where applicable.

Ignoring this obligation can lead to hefty penalties for non-compliance, director disqualification, and increased scrutiny from regulatory bodies like the Ministry of Corporate Affairs (MCA) and the Income Tax Department.

This blog will explain:

• The key differences between cost records and financial records

• The statutory requirements for maintaining both under Indian law

• The importance of CRA-1-mandated reconciliation between cost and financial records

• And how businesses can avoid penalties with expert compliance support from SSCOIndia

Whether you’re a CFO, finance manager, or business owner, understanding these distinctions will help your organization remain compliant, efficient, and audit-ready in 2025 and beyond.

---

2. What Are Financial Records?

Financial records form the foundation of a company’s financial health and are used to convey its performance to external stakeholders such as investors, shareholders, lenders, tax authorities, and regulators. These records are governed by the Companies Act 2013, the Indian Accounting Standards (Ind AS), and, where applicable, Income Tax Act provisions.

Definition of Financial Records

Financial records are the official documents that capture the financial transactions, performance, and position of a business during a particular period. These include but are not limited to:

• Balance Sheet – A statement showing the financial position of the company, including assets, liabilities, and equity at a particular point in time.

• Profit and Loss Account (P&L Statement) – Also known as the income statement, it summarizes revenues, costs, and expenses over a financial year.

• Cash Flow Statement – Tracks the movement of cash into and out of the business, categorized into operating, investing, and financing activities.

• Notes to Accounts – These provide additional disclosures required for transparency, including contingent liabilities and accounting policy assumptions.

• Ledger Books & Trial Balances – Detailed entries that feed into the above statements for auditing and reconciliation purposes.

Governing Laws and Regulations

Under Section 128 of the Companies Act 2013, every company is required to prepare and maintain books of accounts and other relevant books on an accrual basis and according to the double-entry system of accounting.

These records must be preserved for at least 8 financial years and should give a true and fair view of the state of affairs of the company.

Companies must also ensure that these records are compliant with:

• Schedule III of the Companies Act, which prescribes the format for financial statements

• Applicable Ind AS or Accounting Standards

• Audit requirements under Section 143, which mandates the statutory audit of financial statements

Failure to comply with these provisions can result in penalties under Section 128(6), including fines and imprisonment for officers in default.

Purpose of Financial Records

Unlike cost records, which serve internal management, financial records are primarily used for external reporting and statutory disclosure. Their main purposes include:

• Investor Reporting: Shareholders and potential investors rely on financial reports to make informed decisions.

• Tax Compliance: Proper financial records are essential for accurate income tax filing, GST returns, and other indirect tax compliances.

• Regulatory Filings: Financial statements are submitted with ROC filings (MGT-7, AOC-4) and during statutory audits.

• Loan and Credit Assessments: Banks and financial institutions assess a company’s credibility using its financial reports.

• Corporate Governance and Transparency: Well-maintained financial records establish trust and credibility with all stakeholders.

In short, financial records are not just a legal formality—they are a critical communication tool that reflects the financial health and integrity of the business.

What Are Cost Records?

While financial records cater to external stakeholders and statutory reporting, cost records are crucial for internal cost control, pricing decisions, and regulatory compliance under the Companies (Cost Records and Audit) Rules, 2014. These records provide granular insights into the cost structure of products, processes, and services, helping management optimize operations and comply with audit requirements.

Definition of Cost Records

As per Rule 2(e) of the Cost Records and Audit Rules, 2014, cost records refer to the books of account relating to the utilization of materials, labor, and other cost elements. These records are required to be maintained in accordance with CRA-1, which lays down the principles, standards, and formats for cost accounting.

Cost records go beyond general accounting and cover areas such as:

• Material Consumption Reports: Raw materials, components, packing materials, and their wastage

• Employee Cost Reports: Salaries, wages, allowances, benefits, and direct labor cost allocation

• Overhead Cost Schedules: Administration, selling & distribution, factory, and R&D overheads

• Product-Wise or Service-Wise Cost Sheets: Detailed breakdown of production costs by SKU or service line

• Utilities Consumption: Energy, water, and fuel consumption per unit produced

• Inventory Reports: Quantitative reconciliation of stock opening, purchases, issues, and closing balances

• Capacity Utilization: Actual production compared to installed capacity, and reasons for variances

These records help companies accurately assess their cost of production, cost of services, cost of sales, and margins, making them essential tools for effective pricing, budgeting, and management decisions.

Legal Requirement Under Companies Act 2013

Section 148 of the Companies Act, 2013 authorizes the Central Government to mandate the maintenance of cost records for certain classes of companies engaged in specified industries. The list of such industries and thresholds is notified through Rule 3 of the Cost Records and Audit Rules, 2014.

If your company falls under the prescribed class—based on industry type (regulated or non-regulated), turnover threshold, or listing status—you are required to:

• Maintain cost records in CRA-1 format

• Appoint a cost auditor by filing CRA-2

• Submit a cost audit report using CRA-3

• File CRA-4 with the Ministry of Corporate Affairs (MCA)

Non-compliance with these requirements can attract penalties under Section 148, Section 450, and Section 233B (legacy provision), leading to fines, prosecution, and director disqualification.

Importance of Cost Records in Cost Audit

Cost records are the foundation for cost audit. The cost auditor uses these records to prepare the cost audit report in Form CRA-3, analyzing:

• Accuracy and consistency in cost allocation

• Cost control practices across production units

• Margin analysis per product/service

• Profitability reconciliation with financial records

Without proper cost records, a company cannot comply with audit requirements and risks legal penalties and financial losses.

---

Key Differences: Cost Records vs. Financial Records

Many businesses confuse cost records with financial records, assuming that maintaining one fulfills the other’s purpose. In reality, these are distinct record-keeping systems serving different objectives, governed by different rules, and required for separate types of audits.

Here’s a detailed comparison to help you understand the differences between cost records and financial records:

Why Both Matter

Maintaining only financial records is not sufficient for companies subject to cost audit requirements. Without cost records:

• CRA-3 audit report cannot be prepared

• You may face penalties for non-compliance

• Management loses insight into product-level costing, leading to poor decision-making

On the other hand, cost records alone don’t fulfill your statutory financial reporting duties. Together, both sets of records ensure transparency, compliance, and better control over operations and profitability.

---

📌 Pro Tip: The CRA-1 format even includes a section on “Reconciliation of Cost and Financial Accounts,” which mandates aligning the net profit as per cost records with net profit in financial accounts. This ensures zero mismatch, boosts audit credibility, and protects your company from MCA scrutiny.

Why Maintaining Both Records Is Crucial

Maintaining both cost records and financial records is not just good accounting practice—it is a statutory requirement for companies falling under the Companies (Cost Records and Audit) Rules, 2014. Ignoring either set of records can result in non-compliance penalties, faulty decision-making, and even director disqualification.

Compliance Under the Companies Act, 2013

The Companies Act, 2013, under Section 128 and Section 148, mandates applicable companies to maintain:

• Books of account that give a true and fair view of the state of affairs (financial records)

• Cost records for specified industries and companies meeting thresholds (regulated & non-regulated sectors)

If your business is in sectors like pharmaceuticals, chemicals, steel, electricity, telecom, or cement, and your turnover crosses the prescribed limit, then maintaining both records becomes mandatory.

Furthermore, to file:

• CRA-2 (Appointment of Cost Auditor)

• CRA-3 (Cost Audit Report)

• CRA-4 (Filing of Cost Audit Report with MCA)

—having accurate cost records that reconcile with financial records is essential.

Enhances Transparency and Cost Efficiency

From a business perspective, dual-record maintenance offers strategic advantages:

• Financial records serve external users: shareholders, tax authorities, banks, etc.

• Cost records enable internal cost control: tracking material waste, optimizing overheads, improving pricing decisions.

Maintaining both ensures full financial transparency, helping companies:

• Pinpoint unprofitable products/services

• Benchmark costs across plants/branches

• Reduce cost leakages and improve margins

• Respond better to scrutiny from MCA or GST audits

Supports Cost Audit Readiness

Without proper cost records:

• Your cost auditor cannot prepare CRA-3.

• CRA-4 submission becomes invalid or late, inviting daily penalties.

• MCA may flag your company in compliance review, delaying ROC filings or approvals.

Thus, maintaining both cost and financial records is not just about obeying the law—it’s about protecting your business from future legal, financial, and operational risks.

---

Reconciliation of Cost and Financial Accounts (CRA-1 Requirement)

One of the most critical—and often overlooked—steps in cost audit compliance is the reconciliation of cost and financial accounts. As per CRA-1, this is a mandatory requirement and must be included in the cost audit report (CRA-3).

Let’s break down what this reconciliation entails and how to do it right.

What Is Reconciliation and Why Is It Needed?

Reconciliation is the process of aligning figures in the cost records with those in the financial statements to ensure there are no discrepancies in reported profits, expenses, or costs.

The profit shown in cost records may differ from the profit shown in financial accounts due to:

• Different treatment of non-operational income or expenses

• Exclusion of financial charges in cost accounts

• Adjustments for inventory valuation or overhead apportionment

Reconciliation ensures:

• Accuracy of audit reports

• No red flags during MCA scrutiny

• Statutory compliance with CRA-1 and CRA-3 format

CRA-1 Reconciliation Statement: Mandatory Inclusion

As per CRA-1, companies required to maintain cost records must prepare a "Reconciliation of Cost and Financial Accounts" as part of their cost audit documentation. This statement must reconcile:

• Net Profit as per Cost Records

• Net Profit as per Financial Accounts

It should clearly list the items of income and expenditure not considered in cost records, such as:

Tips to Prepare a Reconciliation Statement

Here are some best practices to prepare an effective reconciliation:

1. List All Cost Items: Start by listing cost of production, cost of services, cost of sales, and profit as per cost records.

2. Match With Financial Data: Compare it with the P&L and balance sheet figures.

3. Note Variances: Identify all items excluded or treated differently in financial books.

4. Prepare Additions/Deductions: Adjust non-cost items like interest, provisions, taxes, or abnormal losses.

5. Cross-verify with Auditor: Ensure consistency with statutory audit reports for cross-checking.

The reconciliation must be certified by the cost auditor and included in the CRA-3 report, making it part of the statutory filings with the MCA through CRA-4.

Use as Audit Documentation

This reconciliation also serves as a powerful audit trail. In the event of:

• Income Tax scrutiny

• GST assessment

• MCA or NFRA inspection

—this statement proves that your profit declarations are consistent across internal cost reporting and external statutory filings.

It safeguards your directors and compliance officers from charges of misreporting or non-disclosure and helps maintain investor confidence.

---

✅ Pro Tip: Use accounting software or cost audit consultants like SSCOIndia to automate this reconciliation. Manual processes often result in omissions, delays, or errors, all of which can lead to heavy penalties.

Real-Life Penalties for Misalignment or Non-Reconciliation

Maintaining cost and financial records is not just a procedural requirement—failure to reconcile them can result in real-world legal consequences. Under Section 148 of the Companies Act, 2013, misreporting, inaccurate disclosures, or non-filing of cost audit reports can lead to significant penalties for the company and its officers.

Penalties Under Section 148

Section 148 mandates the appointment of a cost auditor and submission of a cost audit report (CRA-3) to the Ministry of Corporate Affairs (MCA) through CRA-4. If there is a failure to submit the report on time, or if the report contains material discrepancies due to poor reconciliation, the following consequences apply:

• Company Penalty: ₹25,000 to ₹5,00,000

• Officer-in-default Penalty: ₹10,000 to ₹1,00,000 or imprisonment up to 1 year, or both

These penalties are strictly enforced, especially for listed companies or those in regulated sectors such as pharmaceuticals, telecom, power, or infrastructure.

CRA-3 Rejection Due to Discrepancies

When the cost auditor submits CRA-3, it includes:

• Product/service-wise cost data

• Reconciliation of cost records with financial books

• Profitability analysis

If the MCA finds that this report does not match with your financial disclosures under Schedule III of the Companies Act, the report may be rejected. This triggers red flags for:

• Non-compliance status on MCA21 portal

• Legal notices or show-cause under Section 450

• Suspension of future filings or approvals

CRA-3 rejection is often the result of failure to prepare an accurate reconciliation statement, a key requirement under CRA-1.

Director Accountability and Red Flags

Under the Companies Act, Directors and CFOs are personally liable for ensuring correct cost and financial reporting. If reconciliation issues arise:

• Directors may be disqualified from future directorships

• The company may lose cost audit exemptions for upcoming years

• Independent auditors may flag the issue under CARO and statutory audit reports

This not only affects compliance but also impacts investor confidence, credit ratings, and vendor relationships.

---

How SSCOIndia Assists with Cost & Financial Record Compliance

Avoiding these serious consequences is possible with the right support. That’s where SSCOIndia’s cost audit and record-keeping services step in. With years of experience in working with regulated industries, SSCOIndia helps companies stay 100% compliant with CRA-1 to CRA-4.

Industry-Specific Record Keeping Support

Every industry has its own cost drivers, reporting format, and material overhead classification. SSCOIndia offers:

• Customized templates for material consumption, manpower costs, utilities, and machine hours

• Sector-specific cost sheet formats aligned with CRA-1

• Real-time cost tracking dashboards for internal use

Whether you operate in manufacturing, healthcare, energy, or IT services, we align your cost records with industry standards and legal formats.

Reconciliation Templates and Expert Review

SSCOIndia provides CRA-1-compliant reconciliation templates that help bridge the gap between:

• Product-wise cost records

• Financial books as per Schedule III

Our team of qualified cost accountants and auditors:

• Identifies income/expenses not reflected in cost records

• Flags discrepancies early to avoid CRA-3 rejection

• Ensures that reconciliation is audit-ready

With our expert review, your company will always have a robust reconciliation statement ready for MCA, Income Tax, and GST scrutiny.

CRA-1 to CRA-4: Complete Filing Package

We offer an end-to-end CRA compliance solution, including:

This complete package ensures zero penalty risk, timely filings, and a clean compliance track record.

---

Conclusion & CTA

In today’s regulatory environment, maintaining both cost and financial records is not optional—it’s a strategic necessity. Companies that fail to reconcile the two sets of accounts not only violate the Companies Act, 2013 but also risk penalties, audit failures, and director disqualification.

Whether you are preparing for your first cost audit or looking to streamline your CRA-1 to CRA-4 filings, having expert support makes all the difference. At SSCOIndia, we ensure that your cost audit compliance is accurate, timely, and industry-aligned.

📥 CTA: Schedule a FREE Cost & Financial Record Compliance Review with SSCOIndia
Avoid penalties and CRA-3 rejections. Stay fully compliant with India’s cost audit laws.
Book Your Free Compliance Review Now